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In Case Alleging Nationwide Pharmacy Fraud, Kmart Scores Narrow Settlement

On Thursday, March 8, Kmart Corporation inked a settlement of a False Claims Act investigation[1] in which the qui tam relator initially alleged systematic pharmacy billing fraud across twenty-seven states for $525,000.[2]

Brought by a pharmacist formerly employed at a Kmart in Lakeport, California, the original complaint alleged among other things that, instead of using a state-made drug utilization review alert system, Kmart relied on its own electronic systems that were not sufficiently sophisticated to provide detailed alerts such that pharmacy personnel would understand the need for physician or pharmacist input on certain drug fills.[3] The whistleblower alleged that, due in part to these configuration deficiencies and in part to understaffing, pharmacy personnel made a practice of pushing prescriptions through rather than completing consultations and other procedures required by Medi-Cal, California’s Medicaid system.[4]

Rather than cabining the complaint to the state and pharmacy site with which the relator was personally familiar, the relator further pleaded that twenty-six other states’ pharmacy regulations and false claims acts were probably violated by Kmart’s pharmacy practices, including that each state named as a plaintiff suffered damages “in an amount far in excess of millions of dollars exclusive of interest” according to the relator’s “direct and independent knowledge.” In other words, the complaint alleged aggregate damages alone “far in excess” of 50 million dollars, prior to trebling and exclusive of, interest, penalties or costs.

Two and a half years later, Kmart has settled the case for $525,000. The DOJ Press Release references only resolution of allegations related to claims paid by Medi-Cal. It makes no mention of other states as initially alleged in the complaint. The disparity between the potential damages attributable to the conduct alleged in the complaint and the amount Kmart ultimately played is noteworthy. The settlement of litigation alleging that each state-victim suffered millions of dollars in damages for a mere $525,000 combined with the omission of any reference to these claims, raises questions about the merits of the initial allegations. While the settlement amount may seem like a lot, given the cost and disruption inflicted on a company forced to defend allegations as broad as those made by relator, Kmart may understandably view this resolution as vindication.

Of course, the relator’s share of the recovery is $96,500. Additionally, relator’s counsel undoubtedly received an amount from Kmart for attorney’s fees, due to the statutory fee-shifting provisions. No doubt these amounts will be a balm to soothe any disappointment relator or his counsel may experience from the case’s failure to live up to its promise.

[1] See Press Release, Dep’t of Justice, Kmart Corporation Pays $525,000 to Settle False Claims Act Allegations of Improper Medi-Cal Billings (March 8, 2018), https://www.justice.gov/usao-edca/pr/kmart-corporation-pays-525000-settl... (“DOJ Press Release” hereinafter).

[2] See False Claims Act Complaint, U.S. ex rel. Schmuckley v. Kmart Corp. (Nov. 6, 2015) (No. 2:15-CV-2307-TLN-CKD) (“Schmuckley Complaint” hereinafter).

[3] See, e.g., Schmuckley Complaint at 8–9.

[4] See, e.g., id. at 17.

Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.


About this Author

David Douglass, Sheppard Mullin, Government Contracts Attorney

Mr. David Douglass is a partner in the Government Contracts, Investigations & International Trade Practice Group in the firm's Washington, D.C. office.  For more than two decades David has drawn on his prosecutorial and trial experience to advise and represent life sciences companies, health care providers, payers and government contractors on compliance and risk management, defense of government investigations, litigation and, of course, trial. David has represented numerous companies and individuals in criminal and civil, False Claims Act (whistleblower),...

Sean Cuddihy, Sheppard Mullin Law Firm, Corporate Law Attorney

Sean M. Cuddihy is an associate in the Corporate Practice Group in the firm's Washington, D.C. office.